By Evan Herrnstadt and Byoung Hark Yoo.

This paper uses data on mortgages and expected flood damage for each residential property in the United States to examine how much flood damage is expected to increase the cost of federally backed mortgages (referred to as the subsidy cost). The Congressional Budget Office uses its estimate of the subsidy cost to determine the budgetary effects of mortgages guaranteed directly by the federal government and through entities such as Fannie Mae and Freddie Mac. The analysis focuses only on costs to the federal mortgage programs and does not consider any costs borne by homeowners, mortgage lenders, insurers, or government disaster-recovery programs. It also does not capture potential effects related to rising hazard insurance premiums, lack of insurance options, or possible large-scale devaluation of houses.

CBO estimates that the subsidy cost from flood damage is $275 million in fiscal year 2024 under current climate conditions, an amount that is equivalent to 2.9 percent of the total subsidy cost of the mortgages originated in that year. The cost is estimated to increase to $395 million under the climate conditions projected for 2053 based on an intermediate climate change scenario, an increase of 44 percent relative to the effect under current climate conditions. The subsidy cost from flood damage is concentrated in coastal areas. The subsidy rate associated with flood damage in the riskiest 25 percent of census tracts is four times larger than the national average. Those tracts account for about 90 percent of the total subsidy cost nationwide.

Mortgages guaranteed by Fannie Mae and Freddie Mac are estimated to incur a larger cost from flood damage than mortgages guaranteed by other federal programs. That is because flood damage to homes with mortgages guaranteed by Fannie Mae and Freddie Mac is more likely to exceed the flood insurance cap and because a larger share of the associated homes are located in flood-prone coastal areas.